These stocks are poised to bounce

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

I have often spoken of the “tennis balls and eggs” concept. Following a market decline, the leaders bounce into new high-ground the quickest. These are the tennis balls.

The stocks that sit there like a broken egg, without much movement or vigor, are usually destined for a laggard role in the next market advance.

It is the job of the intermediate-term speculator to keep up with the fashion. Just as a retailer of clothing is always on the lookout for merchandise that moves, so must a speculator look for new merchandise that is in big demand.

Among the names to consider now, Regeneron Pharmaceutical
REGN, -1.23%
is perhaps the best example of a tennis ball. The most recent report noted that "...the recent high of $166.39 is a potential entry pivot." Tuesday the stock bolted 7.7% on volume 146% above average. That a stock saw such strength in a holiday-light week of trading speaks, well, volumes. A protective sell stop of 5%-7% below entry on the REGN position is reasonable.

Salesforce.com
CRM, -0.79%
a developer of customer relationship management software, has moved up handsomely off its late 2008 lows. The stock has been basing over the past 16 months. Expected earnings growth increases to 30% for the January 2014 fiscal year. The Oct. 5 high of $159.85 serves as a potential entry pivot.

Acadia Healthcare
ACHC, -0.90%
sets up in a six-week cup base. Earnings growth has been good this year, and 41% growth is expected in 2013. Stocks in its industry group are in the top decile on average. The Oct. 1 high of $24.83 is viewed as a potential entry pivot.

Elsewhere, as noted in the last report, Sherwin-Williams
SHW, -0.90%
Home Depot
HD, -1.04%
Rackspace Hosting
US:RAX
Lumber Liquidators Holdings
LL, -4.18%
and Fortune Brands Home & Security
FBHS, -1.79%
come closest to an attractive entry point. Enterprise software developer Workday
WDAY, -2.76%
is added to this list, though it has more work ahead of it.

As for the market itself, little has changed since the last report. The Nasdaq has closed at or near its session high during the past four days. All were winning outings, which is a mild plus.

Volume has receded in each of the past three days. Some might interpret this as a lack of demand, and thus a sign of weakness on the part of the bulls. In fact, this is normal for a market coming down somewhat sharply and on some volume. This creates a vacuum of sellers, which allows prices to rise on lukewarm volume — a condition that was seen over the past three days.

The first few days of a rally off a low are meaningless, for the most part. This is why the O'Neil follow-through day (FTD) concept, discussed in the last report, ignores the first three days and focuses on day four and those that follow.

It is worth repeating that the FTD concept, which many view in isolation, should be combined with an analysis of the leading stocks. Otherwise, it’s just a mechanical exercise that treats the market as a static being, not the dynamic animal it is.

Adding the action of the leading stocks to the FTD equation turns it into a subjective analysis that defies back-testing.

Due to Friday's half-day session, Monday represents the first session in which a follow-through day is possible.

Shares have some things going for them, which would augur for strength and not weakness. These include leadership by the consumer discretionary, financial and homebuilder sectors.

Other feathers in the market's cap include the relative strength of gold and silver, and the November-January period being the strongest three-month stretch of the year, historically.

Beyond this, however, the leading stocks will be where the rubber meets the road. And it is during intermediate-term corrections and bear markets that new leadership is most likely to appear. Accordingly, it’s imperative to look at the market with an open mind.

Just because a stock leads in one cycle does not mean it will lead in the next. Expecting a former leader such as Apple
AAPL, -1.53%
to become a leader on the next market advance is akin to living in the past. Of course, there is always the possibility that Apple bounces back quickly to its old high, in which case it would offer a valuable look into the health of the next market advance.

But this is unlikely, given the heap of overhead supply of Apple shares.

In summation, the first three days of a rally off a low should usually be ignored. Monday will be day six and represents the first opportunity for the Nasdaq to prove this rally is for real. A few leading lights approach attractive entry points. A truly aggressive speculator can enter one or more of these to preempt strength in the averages.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.